Car Loan Calculations

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Sooner or later, everyone needs or wants to buy a vehicle; and unless you have a money tree in your backyard, you’re going to need to take out a loan.

Virtually every new car purchase needs financing from a bank or other financial institution. The only other option is to pay cash, an option few of us have at our disposal. If you’re in the market for a new car, you’ll need financing, and in order to make the right conclusions, you need to know about car loan calculations. If you fully understand how to make car loan calculations, you’ll be able to estimate the values involved in your purchase, as well as balance the expenses that come with buying a new vehicle. Knowing this information is crucial to buying a car that’s within your budget.

Car loan calculations involve a number of factors. Consider the interest rate, loan term, and loan principal and work them into your calculations. Only then will you know if the car you want is the car you’re able to pay for.

Loan Term

Basically, this is period of time it will take to pay the loan in full. A shorter term will mean higher monthly payments, but the loan will be paid off earlier. Longer terms entail more affordable monthly payments, but it will take more time to meet your obligation. The duration of your loan term can also affect the interest rate, and can increase the amount you pay in interest overall.

Interest Rate

No finance companies or banks will lend you money out of the goodness of their hearts. They yield money from interest. The interest rate establishes how much extra you will pay for the convenience of borrowing money. Interest rates will fluctuate based on the market, and lenders will try to get your business by proposing a lower rate. Shopping around for a good rate can save you hundreds of dollars over the term of the credit.

Loan Principal

This is the base amount of money you borrow, before any financing fees or interests are added on. The amount of your monthly payments, and the total amount of interest you pay, are based exclusively on the principal amount. Obviously, the monthly payments and overall interest will get higher as the principal increases. If you find that the monthly payment is beyond your means, then you should think of starting with a smaller loan principal. In other cases, the term “loan principal” can also be used when referring to your outstanding loan amount. Any time during the term of your loan, you can check to see what your existing loan principal is.

If your loan is an amortization, you’ll know that your first few months of payments will only pay off the interest amount. You can pay $500 a month for 8 or 9 months, only to find that a portion of that amount has been taken off of the principal. However, over time, the payments will balance out and you’ll begin to see more money coming off of the principal. Eventually, the entire loan will be settled.

Buying a car always seems like a wonderful idea, but the payments really can be quite overwhelming. Don’t put yourself in a circumstance where there’s more month than money. Car loan calculations are definitely necessary to putting yourself in the driver’s seat, without putting yourself in the hole.